Acquisition Financing for Distressed Companies: What Buyers need to Know

The distressed company buyer tends to be overconfident as to their plan and underprepared as to their acquisition financing. There are many hidden costs within a distressed company that need capital which adds to the purchase price. Acquisition financing needs to include these costs to ensure the company has the financial structure to reboot and flourish. Most buyers have a big idea as to the best way to transform the company. Most companies fail either because they spend too much or the market rejects their product. While they become distressed rapidly, the erosion is gradual with bad decisions creating loss of capital liquidity. While most buyers indeed have the right idea, they often woefully underestimate the acquisition financing budget to improve working capital and make growth investments.

Acquisition Financing and the True Cost of a Turnaround

Usually, the company is behind on its bills and needs to accelerate its vendor payments to get back to normal. There is also usually a large stack of unpaid invoices that may not have entered into accounts payable. These need to be entered into AP and paid immediately. In addition, underperforming companies usually skimp on spending on new systems and marketing. They make do with ancient technology and old ways of marketing themselves. The buyer needs to factor this into their acquisition financing budget. Most distressed companies also must restructure and get back into profitability which creates a large amount of legacy cost to be funded in the form of severance and lease terminations. The cost of the restructuring as well as the losses incurred post-restructuring before profitability must be included.

Finally, but most importantly, distressed companies are usually behind their peers and need to spend on innovation and new people to increase their market competitiveness. This is usually too big a nut to fund out of cash flow and must be a separate line item in the overall turnaround capital budget. Distressed companies are capital needy in so many ways that it stretches the limits of acquisition financing and requires transformational capital. The right acquisition financing provider can provide this level of capital support within a loan and equity investment capital structure.